FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Separate FDIC Insurance of Savings and Demand
Deposits of Public Units

FDIC-85-11

May 28, 1985

J. William Via, Jr., Counsel

This is to advise, in response to your letter of May 13, that the
Treasurer of ***, as official custodian of that city's public funds, is
entitled to separate deposit insurance of up to $100,000 in toto for
time or savings deposits and of up to $100,000 in toto for demand
deposits placed in the same insured bank in Illinois. See 12 C.F.R.
§ 330.8(a)(2), (5). If the city has autonomous subdivisions or
departments within the sense of 12 C.F.R. § 330.8(c), then each such
additional public unit is entitled to separate deposit insurance for
its public funds in the amounts specified in the preceding sentence,
and it matters not for these purposes if each public unit has its own
official custodian or if the Treasurer of *** is the official custodian
for each, as well as for the city. See 12 C.F.R. § 330.8(a)(6). Of
course, in all cases the custodial nature of an account and the
ownership interests in the deposit funds must be ascertainable,
pursuant to 12 C.F.R. § 330.1(b)(1), (2) (per 12 U.S.C. § 1822(c)).

We understand your view to be that section 11(a)(2)(A) of the
Federal Deposit Insurance Act (12 U.S.C. § 1821(a)(2)(A)), by its
plain terms, not only provides the official custodian of the funds of a
city, or other public unit, with $100,000 in deposit insurance for
funds placed in a time or savings deposit account in each insured bank
(in the state of the public unit's location), but that there is no
limit on the number of such accounts that a given official custodian
can have in a single bank. This reading of the statute would result in
de facto 100 percent deposit insurance for public funds and
is impermissible, under the basic tenets of statutory construction,
given that Congress, in enacting section 11(a)(2)(A), considered and
explicitly rejected 100 percent deposit insurance for public funds.

The bill (H.R. 11221) that added paragraph (2)(A) to section 11(a)
of the FDI Act would have, in its original form, provided full, or 100
percent, insurance for all the deposits owned by public units, be they
demand, or time or savings deposits (and the bill originally would have
also increased the basic deposit insurance limit from $20,000 to
$50,000). See H.R. Rep. No. 93-751, 93d Cong., 2d Sess. 2-3, 6 (1974);
120 Cong. Rec. H470, et seq. (Feb. 5, 1974). It was
subsequently proposed on the floor of the House that 100 percent
deposit insurance for the funds of public units be limited to time
deposits. 120 Cong. Rec. H480, et seq. (Feb. 5, 1974). The
Conference Report (H.R. Rep. No. 93-1429, 93d Cong., 2d Sess. (1974))
contains the language that was ultimately adopted as paragraph (2)(A)
of section 11(a) of the FDI Act (and includes, as well, the basic
deposit insurance limitation of $40,000 that was ultimately adopted).
See 120 Cong. Rec. H9935 (Oct. 4, 1974). Mr. St Germain, explaining the
work of the conference committee, said, in part (120 Cong. Rec. H10277
(Oct. 9, 1974)):

Mr. Speaker, let me make one additional point, the conference
committee worked long and hard on the difficult job of settling our
differences with the Senate conferees on H.R. 11221. We were especially
pleased in agreeing on the principle of 100 percent insurance of
public funds up to $100,000 in view of the fact that the House had
supported the basic principle some months ago. The Senate, however, did
not take a specific position nor did it include a provision on
insurance of public funds in its version of H.R. 11221. [Emphasis
added.]

Mr. Rinaldo, also a member of the conference committee, remarked to
the same effect (120 Cong. Rec. H10273 (Oct. 9, 1974)):

H.R. 11221 will provide full insurance for the first
$100,000 of public funds deposited in financial institutions. This
should also be of great assistance in our effort to increase the supply
of mortgage money. [Emphasis added.]

The legislative history of section 11(a)(2)(A) reveals that those
who opposed expansive or unlimited deposit insurance for public funds
argued that such insurance would have a substantially adverse effect on
the demand for, and thus on the market for, state and municipal bonds,
which were (and are) typically used as collateral for uninsured
deposits of public funds. See, e.g., H.R. Rep. No. 93-751,
supra. There was also concern by supporters of the housing
industry that thrift institutions had not been getting enough deposits
of public funds, which was said to be largely a result of the greater
resources available to commercial banks for the purchase of the bonds
used for collateral for such deposits in excess of the deposit
insurance limit. The interest rate advantage enjoyed by thrift
institutions for deposits under $100,000 was also a factor in the
deliberations that led to the compromise that was ultimately reached
whereby the time or savings deposits of a public unit in a single
insured bank (or in an insured thrift institution) are insured to a
maximum of $100,000. In this connection, Mr. St Germain commented
thusly, at 120 Cong. Rec. H10277 (Oct. 9, 1974):

At the time of the conference, it was agreed that the main
purpose of raising the insurance limit on public funds was to give the
savings and loan associations and mutual savings banks, which are
institutions primarily concerned with providing home financing, a
useful tool in attracting some of the public units throughout the
United States to invest in these institutions. Commercial banks, of
course, already enjoy an overwhelming superiority in this type of
deposit.

It was also the intention of the conferees that in bidding for
these funds up to $100,000, the thrift institutions would not sacrifice
the principle of the needed differential which they have historically
enjoyed over the rate set for commercial banks--the main purpose of
which is to give depositors an incentive to put their money in these
institutions that support home finance.

The effect of the compromise legislation (Pub. L. 93-495) was to
provide $100,000 in deposit insurance for a public unit's time or
savings deposits in a single insured bank at a time when the basic
deposit insurance limit was only $40,000, the latter having been raised
to that figure (from $20,000) by the same enactment. Thus, the last
sentence of section 11(a)(1) read at the time, "Except as provided
in paragraph (2), the maximum amount of the insured deposit of any
depositor shall be $40,000". The basic insurance limit was
subsequently, in 1980, increased to $100,000, but no change was made in
the $100,000 limit set in paragraph (2) of section 11, so that reading
section 11(a) now without the benefit of the legislative history makes
it seem plausible (but it is nonetheless erroneous) to conclude that a
public unit is entitled to more than $100,000 in deposit insurance for
its time or savings deposits in a single insured bank.

We do not agree that the language of section 11 is unambiguous,
apart from the ambiguity alluded to in the preceding paragraph. The
section does not, for example, define the terms that it uses, notably
"account", which in its ordinary or dictionary sense is not
confined to one meaning. Moreover, the meaning of a statutory section
is not to be (and frequently cannot be) ascertained by reference to its
language alone. Rather it must be read in juxtaposition with other
provisions of the larger statutory scheme, here the FDI Act, and this
must be done in light of the objective or purpose that Congress sought
to achieve, as revealed by the statutory scheme itself and amplified by
pertinent legislative history.

Section 3 of the FDI Act (12 U.S.C. § 1813) is a
definitional provision, which, while it does not define "account''
(or "per account''), needs to be consulted in construing section 11.
At the outset, it must be noted that the first sentence of section
3(m)(1) defines the term "insured deposit" as the net amount due
any depositor (other than an official custodian of
public funds) up to $100,000. As in the
case of the last sentence in section 11(a)(1), discussed above, this
limit in section (3)(m)(1) read $40,000 in 1974 (when paragraph (2) was
added to section 11(a)). The parenthetical exception in the first
sentence of section 3(m)(1) for depositors who are official custodians
of public funds makes sense today, however, for it is consistent with
the determination made by the FDIC that while Congress meant by section
11(a)(2) to limit the deposit insurance for the time or savings
deposits of a public unit to $100,000 in a single insured bank,
Congress also meant for each public unit to be able to have an insured
demand deposit of up to the basic insurance limit in the same bank.

The second sentence of section 3(m)(1), in relevant part, states
that "in determining the amount due to any depositor there shall be
added together all deposits in the bank maintained in the same capacity
and the same right for his benefit either in his own name or in the
names of others . . ." The effect of this is to require that the
time or savings deposits maintained in a single insured bank by an
official custodian for a public unit be added together and insured to
$100,000 in total. The first clause of paragraph (2)(A), section 11,
does not change this requirement for, as we have seen, the purpose and
effect of that clause was to confer a $100,000 insurance limitation on
public unit time or savings deposits when the basic insurance limit was
$40,000.

It must be noted also that, by the last sentence of section 3(m)(1),
Congress has conferred on the FDIC considerable authority to clarify
and define deposit insurance coverage. That provision states, in
essence, that for the purpose of clarifying and defining the insurance
coverage under section 3(m) and section 7(i), the FDIC is authorized to
define, with such classifications and exceptions as it may prescribe,
the terms used in those sections and certain others, including section
11(a), and the extent of the insurance coverage resulting therefrom.
The FDIC, of course, relied on this authority, among others, in
adopting its deposit insurance regulations.

We gather from your letter that you also question the validity of
the Legal Division's March 19, 1985 opinion (subsequently ratified by
implication by our Board of Directors) to Colorado's State Treasurer
holding that multiple custodians of public funds appointed by the
Treasurer pursuant to section 24-36-109 of the Colorado Revised
Statutes are not "official custodians" for purposes of 12 C.F.R.
§ 330.8 and are not entitled to separate deposit insurance coverage.
That opinion found that the multiple custodians appointed as aforesaid
exercised no control over public funds (they simply held deposits in
their name for the Treasurer) and were not, therefore, custodians in
fact, and appeared to have been appointed solely to increase deposit
insurance coverage.

While the facts of the Colorado multiple custodians case enabled us
to have the March 1985 opinion turn on the narrow issue of control, we
have, as anticipated, subsequently had occasion to opine in broader
scope on the requirements for recognition as an "official
custodian." While provisions of state law are germane to this issue,
it is clear that the ultimate question is one of Federal law.

We have concluded that, in order to qualify as an "official
custodian" under 12 C.F.R. § 330.8, a designee, whether an
officer, employee or agent, must have plenary authority (which
concludes control) over funds allocated to the public unit which the
custodian is appointed to serve. Control of public funds includes
possession, as well as the authority to establish accounts for such
funds in insured banks and to make deposits, withdrawals and
disbursements. The deposit insurance available to a public unit cannot
be increased merely by fragmentizing such authority over that unit's
funds among several putative official custodians. Similarly, if the
exercise of authority or control over the funds of a public unit
requires action by or the consent of two or more putative official
custodians, then they will be treated as one "official custodian"
with respect to such funds for the purposes of the 12 C.F.R. § 330.8.

We are of the opinion that the foregoing meaning of "official
custodian" is compelled by due regard for the principle that the
language of a statute must not be construed so as to render it
ineffective, or a nullity, in terms of its purpose. The FDI Act in
sections 3(m)(1) and 11(a)(2)(A) speaks of an "officer, employee, or
agent" having "official custody" of
public funds without defining these
terms, leaving that task, as we have seen, to the FDIC. Similarly, our
regulation (12 C.F.R. § 330.8) uses the term "official custodian''
without defining it. We are confident that the construction we have
given the term is proper and that it would be approved by our Board of
Directors. To hold otherwise, that is to hold that a public unit can
increase the deposit insurance available to it by the mere conferring
of a title or by fragmentizing the authority over its funds among
several putative official custodians, whether they be officers,
employees or agents, would result in the virtual nullification of the
statutory provisions limiting deposit insurance for public funds and
is, therefore, impermissible.

We trust that this rather protracted discussion constitutes an
adequate response to your question, which is a fair one, but if we can
be of further service, please let us
know.